In this course, you will learn all of the major principles of macroeconomics normally taught in a quarter or semester course to college undergraduates or MBA students.
Perhaps more importantly, you will also learn how to apply these principles to a wide variety of situations in both your personal and professional lives. In this way, the Power of Macroeconomics will help you prosper in an increasingly competitive and globalized environment.
This course is also available in Portuguese. To join the fully translated Portuguese version, visit this page: https://www.coursera.org/learn/macroeconomia-pt/

Enseigné par

Dr. Peter Navarro

Professor

Transcription

[MUSIC] Let's turn, now, to the second major component of the aggregate expenditures curve, namely investment. Investment expenditures include purchases of residential structures, investment in business plant and equipment, and additions to a company's inventory. Investment in plant and equipment is by far the biggest category, averaging a full 70% of total investment annually. While total investment expenditures account for roughly 15% of total aggregate expenditures. In the Keynesian model, investment expenditures are assumed to occur independently of the level of income. Algebraically, this means that investment I is simply equal to autonomous investment I naught. The advantage of this assumption, is that it allows economists to draw the investment function as a horizontal line. This is illustrated in this figure. The curve I1 shows annual business investment in 1929, just prior to the stock market crash, at $16 billion. The curve I2 shows investment after it has fallen to $1 billion by 1933. If investment is not determined by the level of income, it is useful to ask here, what are the determinants of investment? To Keynes himself, there were at least two important factors. First, he believed that investment was sensitive to changes to the interest rate. When that rate falls, investment rises, when the interest rate rises, the investment falls. Note however, that while Keynes believed the interest rate was important in determining investment he did not believe that falling interest rates. And increased investment would necessarily lead to a full employment equilibrium like the classical economists did. This is because Keynes believed that investment was in large part driven by a second important determinant, namely the expectations or business confidence that businesses had regarding potential sales and profits. Keynes referred to these expectations as Animal spirits. And basically said that, if businesses believe the economy was about to go bad, it could become a self-fulfilling prophecy. The reason? Businesses would cut back on investment and production. And thereby help trigger a recessionary spiral. The third component of aggregate expenditures in the Keynesian model is government spending, this includes purchases of goods like tanks or road building equipment as well as the services of judges and public school teachers. Unlike private consumption and investment, this component of aggregate demand is determined directly by the government's spending decisions. When the Pentagon buys a new fighter aircraft this output immediately adds to the GDP. Such government expenditures account for almost 20% of total aggregate expenditures in the U.S. and as with investment, the Keynesian model assumes government expenditures to be autonomous. That is, determined outside the model. This means algebraically that government expenditures G simply equal autonomous government expenditures G naught. And as with the investment function, the government expenditure function can be graphically portrayed as a horizontal line. In general, government expenditures exhibit much less volatility than investment, although episodic events such as wars and natural disasters can lead to large fluctuations. In the Keynesian model, increased or decreased government expenditures, together with tax cuts or tax increases, serve as the primary tools of fiscal policy that are used to counterbalance changes in investment and consumption spending. Specifically, expansion fiscal policy involves increased government expenditures, tax cuts or some combination of the two to stimulate a recessionary economy and close a recessionary gap. In contrast, contractionary fiscal policy involves reduced government expenditures, tax hikes or some combination of the two to cool down and overheated economy. In addition to discretionary changes in government spending and taxes, there are also important non-discretionary government expenditures. That act as built-in macroeconomic stabilizers. These non-discretionary expenditures are called transfer payments, and they include such things as unemployment compensation to workers, welfare payments, and subsidies to farmers. These transfer payments, help stabilize the macro economy, because they automatically rise during recessions, and fall during expansion. This is because during recessions, as more and more people become unemployed, they become eligible for these programs. And as the economy expands, there is less need for these programs, and fewer payments. The fourth component of aggregate expenditures, is net exports. This component equals the value of exports, minus the value of imports. US exports include such things as the sale of airplanes to China, beef and oranges to Europe, an medical equipment to Canada, US imports include such things as Japanese made automobiles, Korean made running shoes, and oil from the Middle East. Because exports create domestic production, income, and employment for an economy, they must be added to aggregate expenditures. However, when we purchase imports from a foreign country, no such production, income, and employment is created, so that imports must be subtracted from aggregate expenditures. While net exports are a very important part of a global or open economy, they were not central to the development of the Keynesian multiplier model. So for the remainder of this lesson we shall do what economists often do, make a simplifying assumption. We'll assume a closed economy in which there is no international trade and drop net exports from the model. This allows us to focus solely on the role of government spending in fiscal policy. Don't worry, we'll deal with international trade and trade deficits in a subsequent lesson.